Home Articles Why ETFs are the Best Option for 95% of Investors

Why ETFs are the Best Option for 95% of Investors

Robinhood, eToro, and other Wall Street brokerages estimate that greater than 90% of stock and options day traders lose money over the course of a year.

The statistic seems far off if we were strictly looking at our social media feed as a gauge. Everyone appears to be making money trading penny stocks and buying far out-of-the-money calls. In reality, the 5-10% of people that do profit are disproportionally flaunting their successes across the internet.

The harsh reality is that few people (if anyone) know how the markets will behave on a day-to-day basis. Rarely does any combination of fundamental analysis, narrative chasing, or technical analysis provide you with a profitable strategy for the long term.

For this reason, along with the time and effort it takes to adopt day trading strategies, the far majority of retail investors are better off investing in ETFs and letting the markets work for them. Here are a couple of concise reasons why ETFs are a strong investment vehicle.

1. Simple Market Exposure

You’re likely familiar with US indices like the S&P 500, NASDAQ, Russell 2000, and DOW Jones Industrial Average. A quick recap:

• S&P 500: 500 largest US companies by market capitalization (broad market).
• NASDAQ: Almost all stocks on the NASDAQ stock exchange (tech-heavy).
• Russell 2000: Smallest 2000 stocks by market capitalization in the Russell 3000 Index (small-caps).
• DJIA: 30 prominent US companies, a price-weighted index (“legacy” companies).

Courtesy of Financial Express
Exchange-traded funds offer seamless exposure to these leading indices and many others. Any fund you can dream up likely already exists and can be invested in without the need to purchase each asset individually. ETFs also take the complication out of researching individual companies that people subjectively pick to perform well.

2. Invest in Volatile Sectors with Less Risk

To emphasize again: We think we’re good at picking assets that will outperform a sector. The data says otherwise.

As new industries/sectors emerge in the United States, you’ll hear theses from all over about how it will grow or decline over the next decade, which companies in the sector will perform best, and any other angle that analysts can form an opinion on.

It’s easier to ignore the noise and identify ETFs that will give you exposure to a sector you believe in. Emerging sectors often don’t have clear market winners, and your individual investments will carry greater risk.

A great example of this is in the gambling/sports betting sector. The industry is growing fast, but market share is still shifting between the top players. The iBET Sports Betting & Gaming ETF provides you exposure to the entire industry without needing to take any extended risk on a single company.

iBET ETF Top Holdings as of 03/28/2022
iBET ETF Top Holdings as of 03/28/2022

 

3. Flexible & Accessible Trading

Unlike a mutual fund, ETFs offer entry at any time the markets are open. With the comfortable liquidity of many ETFs, you won’t need to worry about getting in and out of a position any time of day. Instantaneous price updates and trade opportunities make ETFs a flexible investment vehicle.

Additionally, ETFs offer access to markets that may otherwise be unavailable. It can be difficult to gain exposure to some international markets, but there are plenty of ETFs that will offer a diversified basket of foreign assets. This could be both continental and national groupings.

For those that don’t trade futures contracts, ETFs act as a bridge that allows everyone to participate in the commodities markets. Whether you’re long gold, corn, wheat, lumber, or all of them, you can find an ETF to serve your needs.

ETFs provide unparalleled trading flexibility and access, all while combating risk through diversified exposure.

SOURCERoss Boothroyd